Even though reports based on the revised Texas franchise tax, or "Margin Tax," will be filed starting next year, rules for administering the existing franchise tax are still being amended. Most recently, the Comptroller amended a nexus rule and two rules addressing apportionment.

Rule 3.546 entitled "Taxable Capital: Nexus" has been revised effective December 28, 2006, to remove the status of "being authorized to do business in Texas" as a nexus-creating factor for purposes of the taxable capital component of the franchise tax. According to the preamble to the amended rule, the amendment reflects a statutory change made by House Bill 2424 in 2003. So, under the amended rule, just being authorized to do business in Texas doesn't create nexus for purposes of the taxable capital component of the existing franchise tax. (A second, and minor, change to Rule 3.546 redesignated the reference to the trade show exemption in the Comptroller's rules from Rule 3.541 to Rule 3.542).

While much attention has been focused on the coming of the revised Texas franchise tax, the existing version of the tax is still around. Importantly, the lawsuit challenging a key provision of the current tax is still pending at the Texas Supreme Court. While the outcome of that case - Home Interiors & Gifts, Inc. v. Strayhorn, et al., 175 S.W.3d 856 (Tex. App.--Austin, 2005) - may not have much impact once the new alternative margins tax becomes fully effective in 2008, it could be highly significant for past years' franchise taxes and potential refund claims to recover those taxes. With that in mind, other Texas-based businesses engaged in manufacturing, wholesaling and similar activities that ship goods to customers located outside of this state should file, and should continue filing, timely refund claims to protect their rights.

Today, May 2nd, the Texas Senate passed HB 3 reforming the franchise tax into the so-called "alternative margins tax." Because the Senate passed the bill sent to the floor as the Senate Finance Committee's Report that made no changes to the House's engrossed version of HB 3, no conference committee will be necessary. The bill can now go to the Governor for signature and enactment into law.

The Texas Legislature is approaching the halfway point of the 30-day special session on public school finance and tax reform that began on April 17th, so here's a summary of where things stand and what's ahead.

To recap, the Texas Tax Reform Commission proposals were separated in the House Ways & Means Committee into multiple bills, all of which have been passed by the full House and sent to the Senate. The bills comprising the House's tax reform package are the following: (1) HB 1 - relating to public school finance and the property tax rate; (2) HB 2 - relating to the allocation of certain revenue from franchise taxes, motor vehicle sales and use taxes, and taxes on cigarettes and other tobacco products to provide property tax relief; (3) HB 3 - reforming the franchise tax into the so-called "alternative margins tax;" (4) HB 4 - relating to motor vehicle sales and use taxes; and (5) HB 5 - relating to cigarette and tobacco products taxes and fees. Here's the status of those bills as of Sunday, April 30th:

The Texas House of Representatives has completed the engrossed version of HB 3, the bill containing the franchise tax reform provisions that would create the so-called "Alternative Margins Tax," and has sent it to the Senate for consideration. As a result of incorporating the numerous floor amendments added in the House, the engrossed bill has grown to 105 pages. It's now the Senate's turn to make its changes to the House version.

[Caution: these comments are based on the draft bill presented by the Texas Tax Reform Commission on March 29th, and actions by the upcoming special session of the Texas Legislature could significantly affect the accuracy of these comments.]

The draft bill included in the tax reform proposals of the Texas Tax Reform Commission would eliminate the twin components of the tax base in the current franchise tax, namely capital and earned surplus, and substitute a single component called "margin." While the draft bill would generally apply the apportionment methodology in the existing franchise tax to apportioning margin, it would make an extremely significant change by eliminating the so-called "throwback rule."

The Texas Comptroller of Public Accounts is in the midst of a thirty day review of numerous existing tax rules that the agency is considering for readoption, revision, or repeal. The review will include, at a minimum, whether the reasons for adopting or readopting the rules continue to exist. This type of periodic rule review is required by a provision of the state Administrative Procedure Act and presents an excellent opportunity for taxpayers to comment on rules that have been difficult to understand or apply. Regrettably, few taxpayers take advantage of these periodic opportunities, and, as a result, many rules are simply readopted in their existing form.

With the special session of the Texas Legislature on public school finance and tax reform scheduled to begin on April 17th, both houses of that body are beginning to show great interest in the recently-announced proposals of the Texas Tax Reform Commission. For example, this past Monday, April 3rd, the Senate Select Committee on Education Reform & Public School Finance held a public hearing that included presentations by the Texas Tax Reform Commission's Chair, John Sharp, its Research Director, James LeBas, and several other witnesses who addressed the Commission's public school finance and tax reform proposals. The testimony provided considerable insight into the Commission's reasoning behind many of the technical aspects of its draft bill. The hearing was recorded in two parts, and both can be accessed at the April 3rd links on the Video Archives of 2006 page of the Texas Senate's web site.

[Caution: these comments are based on the draft bill presented by the Texas Tax Reform Commission on March 29th, and actions by the upcoming special session of the Texas Legislature could significantly affect the accuracy of these comments.]

On March 29th, the Texas Tax Reform Commission presented its school finance and tax reform proposals, including a draft bill modifying the franchise tax into an "alternative margins tax," or AMT, although that term is not used in the draft bill or in the Commission's analysis of its proposals. The draft bill is lengthy and complex and, if enacted as written, would greatly alter the operation of the current franchise tax.

Update: The Texas Tax Reform Commission has been assigned a live internet broadcast channel for its public hearing on Friday, March 31st

The Texas Tax Reform Commission has been assigned a live broadcast channel for its public hearing on Friday, March 31st. That channel is "LiveStream1" on the Video/Audio page of the web site of the Texas House of Representatives. The hearing is currently scheduled to begin at 10:00 a.m., but, as always, anyone planning to watch the proceedings over the internet should check the House video/audio page for any last minute changes to the channel assignment.

The Friday hearing will most likely consist of public testimony on the Commission's tax reform proposals. Those proposals are expected to be announced at a public hearing two days earlier, on Wednesday, March 29th, at a location still to be determined according to the Commission's web site. No live internet broadcast channel has as yet been assigned to the March 29th hearing.

The Texas Tax Reform Commission has finished holding its public hearings around the state and plans to announce its tax reform recommendations to be considered in the upcoming special session of the Legislature called to fix the state's public school financing system. The Commission's announcement had been expected as early as this Tuesday, March 21st, but may be delayed for a week or so. That's because the March 21st meeting date link on the Commission's home page now has no meeting occurring on that date but does show a meeting scheduled for 10:00 a.m. on March 29th at a "TBD" location, with another meeting scheduled for 10:00 a.m. on March 31st in the Capitol Extension Auditorium.

Regardless of when the Commission makes its long-awaited announcement, the latest thinking is that it intends to recommend replacement of the existing franchise tax with a broad-based business tax currently referred to as the "Alternative Margins Tax." Subject to all of the usual disclaimers about speculating on what hasn't yet been announced, and that the Commission is just a Commission and not the Legislature, this is the first of what will likely be many posts discussing some of the potential issues that could arise under a new Alternative Margins Tax.

With very little fanfare, the Texas Senate Finance Committee held a hearing on March 15th that addressed one aspect of its interim charge on tax reform; that is, the impact of the state and local tax structure on the competitiveness of Texas businesses relative to their counterparts in neighboring states.

Update: Texas Senate Select Committee on Education Reform and Public School Finance has cancelled its March 21st public hearing and hasn't scheduled any more hearings

According to the latest Revised Hearing Timeline of the Texas Senate Select Committee on Education Reform and Public School Finance, the public hearing previously scheduled for March 21st has been cancelled, and no further Committee hearings have been set. No explanation was given on the Committee Home Page for this latest cancellation or for the lack of any planned future hearings.

At this point, the Committee has held only three public hearings, on January 24th, February 6th and February 27th. With this latest cancellation, it now seems unlikely that the Committee will hold any more hearings before the Governor calls the special session on public school finance reform in the next few weeks.

Here is another example of why Texas is a sales tax-friendly state for aircraft repairs.

Last November, the Comptroller issued a private letter ruling in response to a question of whether sales tax is due on the inspection and repair of survival rafts used on aircraft. The Tax Policy Division advised, first, that a charge to inspect survival rafts is not taxable because this is not a taxable service. The Division then took the opportunity to provide an outline of the analysis for determining the taxability of the charges to repair such rafts.